Energy

Can The U.S. Outlaw OPEC+?


Ever since the first oil price crisis in 1973 there have been numerous ideas bruited about to ‘defeat’ or counter OPEC, from lawsuits against their uncompetitive behavior to philosopher Gallagher (of Sledgeomatic fame) proposing to drill a well through the earth and suck the oil out of the Middle East. On a more serious note, the idea that military action might be taken to force oil exporting countries to sell us oil was allegedly discussed in 1973 by U.S. officials, although it is difficult to know how seriously. Other ideas, such as withholding wheat exports, selling import ‘tickets’ to exporters for the right to sell oil in the U.S., and even a cartel of oil importing nations were all discussed but not adopted.

(The International Energy Agency, now primarily known for its research, was formed to counter a possible new embargo by requiring members to share their oil, making it harder to target a specific country with sanctions. Since that time, the biggest ‘embargoes’ have been by consumers against Iraq and Iran.)

Currently, the Congress is considering a bill called “No Oil Producing and Exporting Cartels” that would, um, outlaw coordination among oil exporters, presumably to bring prices down. It reminds me of two International Energy Forums I attended, in Riyadh in 2000 and in Tokyo in 2002, where two different U.S. energy secretaries lectured the assembled ministers that free markets were needed to stabilize oil prices. (By which they obviously meant ‘reduce’ prices.) Both times I explained that commodity prices are naturally volatile and added that there was no such thing as a free market: it’s a theoretical construct. This was especially poignant in 2002, since the U.S. had just announced restrictions on steel imports in support of the domestic industry. (Translation: raise prices.)

Which highlights the peculiarity of the U.S. political economy with regard to anti-competitive behavior and the Sherman Anti-Trust Act, spurred in part by the Standard Oil Trust. That company was broken into component parts and the U.S. oil industry has ever since had a fairly high degree of competition—although it varies by time and place.

So, the U.S. has a history of opposing price-stabilizing, anti-competitive, cooperation amongst oil producers, right? Well, funny thing about that. The Texas Railroad Commission was empowered to regulate oil and natural gas production in the state, initially focusing on safety and conservation but in 1930, at the height of the Great Depression, it began pro-rating production, that is, requiring oil producers to cut back in order to balance the market. (Translation: raise prices.) It literally did what OPEC+ is doing without political or legal repercussions.

They were joined in 1935 by six other states who formed the Interstate Oil and Gas Compact Commission because they were “Faced with unregulated petroleum overproduction and the resulting waste, the states endorsed and Congress ratified a compact to take control of the issues.”[i] Translation: prices were too low.

And truth be told, the U.S. has a long history of manipulating markets. In fact, FDR moved to support the prices of many commodities, especially in the agricultural sector, and those programs lasted for decades. I already mentioned the 2002 steel tariffs—which apparently didn’t encourage steel users to ask Congress for a “Stop the Steel Steal” law.

The reality is that cartels have long been used internationally, especially for the purpose of stabilizing industries (like steel) when recessions cut demand, the idea being that post-recession, demand will recover and losing capacity to shutdowns because of a temporary situation which the industry didn’t cause would be wasteful. Unfortunately, this has often led to over-capacity plaguing various industries but that’s a problem of implementation, not theory.

Now, if I were in charge of OPEC+ (they have my number, hint, hint), I would search for a way to bring prices down. As has often been said, the cure to high prices is high prices and when prices first soared in the early 2000s, I warned that the industry risked creating a new competition. Canadian oil sands were thought, in the 1970s, to be very expensive to produce, but worth it since ‘everyone knew’ that oil prices would never go down. But when prices crashed in 1986, the industry reworked the engineering and brought costs down so much that investment began to rise in the 1990s, when oil prices were $30 a barrel (2020 dollars). (The boom later saw a cyclical increase in costs.)

This is not to say that the current shale boom was the result of high prices in the 2000s. (I was not aware of shale developments at that time, just was speaking hypothetically). Nor does it mean that consumers will wholeheartedly embrace electric vehicles because of high gasoline prices, as one possible reaction. But an extended period of high prices does raise the risk that demand for oil from OPEC+ will drop, as it did in the 1980s, sending prices much lower.

Aside from the practical issue (will U.S. troops stand guard over foreign oil valves?), the ethical question of such a law remains. As much as I would like to see oil prices come down, ordering a sovereign government to produce and sell you goods—whether crude oil, palm oil, or vaccines—simply is beyond the bounds of acceptable behavior. The U.S. government has often paid farmers not to ‘overproduce’ various crops, the only commodity more important than oil. Yet imagine the outrage that would flow if a foreign nation passed a law making the practice illegal.

[i]

OkHistory



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